Q: Which equation correctly represents economic profit, accounting for both explicit and opportunity costs?

$$\text{economic profit} = \text{total revenue} - \text{total economic cost}$$

Question 1

A firm is considering whether to invest in new machinery or hire more workers. If the price of capital decreases while the price of labor remains constant, which technology is the firm most likely to choose?

Accepted Answer

Capital-intensive technology, because the cost of capital is now lower.

Question 2

Which equation correctly represents economic profit, accounting for both explicit and opportunity costs?

Accepted Answer

$$	ext{economic profit} = 	ext{total revenue} - 	ext{total economic cost}$$

Question 3

A sandwich shop hires 2 employees and produces 25 sandwiches per hour. The marginal product of the second employee is:

Accepted Answer

15 sandwiches

Question 4

If a firm’s marginal product of labor is below the average product of labor, what happens to the average product?

Accepted Answer

The average product falls.

Question 5

Which of the following best describes the law of diminishing returns?

Accepted Answer

After a certain point, adding more units of a variable input to fixed inputs causes the marginal product to decline.

Question 6

A firm faces the following costs: $$15,000 for materials, 14$$,000 for labor, and a normal return on capital of $$2,000. If total revenue is 30$$,000, what is the economic profit?

Accepted Answer

$$-1,000$$

Question 7

In the short run, which of the following conditions must hold?

Accepted Answer

The firm operates under a fixed scale of production and cannot enter or exit the industry.

Question 8

Which formula represents the slope of an isoquant?

Accepted Answer

$$\frac{\Delta K}{\Delta L} = -\frac{MP_L}{MP_K}$$

Question 9

A firm is choosing between five technologies to produce 100 diapers. If the price of labor increases relative to capital, which technology is most likely to be cost-minimizing?

Accepted Answer

The technology that uses the least labor and most capital.

Question 10

Which equation represents the cost-minimizing equilibrium condition for a firm using two inputs, labor and capital?

Accepted Answer

$$\frac{MP_L}{P_L} = \frac{MP_K}{P_K}$$

Question 11

A firm’s production function is given by $$Q = f(L, K). If $$both labor and capital are increased by 10%, and output increases by 10%, what type of returns to scale does the firm exhibit?

Accepted Answer

Constant returns to scale

Question 12

Which of the following is NOT a basic decision that all firms must make to maximize profits?

Accepted Answer

How to set the market price of output

Question 13

If a firm’s average product of labor is at its maximum, what is true about the marginal product of labor at that point?

Accepted Answer

Marginal product is equal to average product.

Question 14

A manufacturing firm is considering preventive maintenance. If preventive maintenance reduces total downtime from 1416 hours to 356.4 hours per year, what is the primary economic benefit?

Accepted Answer

Reduced cost of lost revenue due to less downtime

Question 15

Which of the following best describes an isoquant?

Accepted Answer

A graph showing all combinations of capital and labor that can be used to produce a given amount of output.

Question 16

If the slope of an isocost line is $$-\frac{P_L}{P_K}$$, what does this represent?

Accepted Answer

The rate at which labor can be substituted for capital, holding cost constant.

Question 17

A firm’s total product curve flattens as more employees are hired. What does this indicate about the marginal product of labor?

Accepted Answer

Marginal product is decreasing.

Question 18

Which of the following is a real-world example of complementary inputs in production?

Accepted Answer

Investing in modern equipment to increase worker productivity.

Question 19

If a firm’s total cost is given by $$TC = P_K \cdot K + P_L \cdot L$$, what happens to the isocost line if $$P_L$$ increases while $$P_K$$ remains constant?

Accepted Answer

The isocost line becomes steeper.

Question 20

A firm’s production function shows diminishing returns to labor. Which of the following best explains this phenomenon?

Accepted Answer

Each additional worker produces less additional output than the previous one.

The Production Process: The Behavior of Profit-Maximizing Firms

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